Howard's way with shares

FORGET the maestro Greenspan. Britain has discovered its own virtuoso in the shape of Sir Howard Davies. As soon as the Financial Services Authority chief waved his baton, the Footsie responded - climbing, believe it not, for the second day in a row. So what was the wisdom that Howard (don't call me Sir) Davies had to impart?

He admitted that a big fraud 'could happen here', but argued that Britain's system of audit and accounting regulation has far greater independence than the US. After Maxwell, BCCI, Barings and Polly Peck, it would be a pity if it didn't. More significant about Davies' remarks was his analysis of market falls. He noted rightly that the FTSE 100 has fallen 40% from its peak, against 27% for the Dow Jones. Moreover, the FTSE sells at 17 times company earnings, against 24 in New York.

Without wishing to nitpick, Davies might also have observed that many of the biggest casualties in the American accounting scandals - including WorldCom and great swathes of the hightech stocks - were quoted on Nasdaq, not the New York Stock Exchange. The Dow is dominated by old-economy stocks - notably big oil - where so far (with the exception of Anglo-Dutch Shell) fewer accounting questions have been raised.

So what in Davies' view are the threats to sound markets here? The split capital investment trusts, where Aberdeen Asset Management is a leading player, are plainly not his favourite sector. He thinks these highly-leveraged trusts, which invested in each other, are an 'unhappy episode' for the City, particularly as 'exaggerated and 'absurd' claims were made about their safety. He also has worries about the life industry. Davies believes companies are meeting solvency requirements - but also recognises that falling share prices are damaging asset bases.

His response has been to try and 'head off' particular problems. One hopes that, this time, the FSA is more prescient than it was with Equitable Life. Sir Howard refers to the fine work of the FSA in compensating people mis-sold pensions. He quickly jumps from here to the need for reform of the industry, the Sandler report and, in particular, the need to develop simpler products, not yet available in the market place.

He skips gently past the scandal of endowments that are failing to meet mortgage payoff promises by ever bigger margins, though it was not until the last three years that stock markets started to move in the wrong direction.

Still, in the present turbulent circumstances, Davies may prefer to let the sleeping endowment mess lie.

Farewell prudence

CAUTION replaced prudence in Gordon Brown's affections in his appearance before the Treasury Select Committee. 'We don't assume revenues that are not there,' he assured his questioners. We must trust this is the case.

But, as Norman Lamont would testify from his experience as Chancellor, when the green shoots of recovery fail to appear on time, revenues have a nasty habit of vanishing before your eyes and being replaced by large deficits. Then the only solution is hefty tax increases.

The June figures for the public finances are not very reassuring to Brown as he embarks on his spending spree. Receipts fell off sharply across the board, dropping 5.7% year on year. Several of the main categories of revenue, including income tax and VAT, were sharply down. Were it not for what Geoffrey Dicks of RBS calls a 'bizarre £4.7bn or 16% drop in spending by government departments', the public sector's net debt of £2.1bn would have been far higher.

Even a minor glitch in the most cautious economic assumptions can deliver serious budgetary problems.

Buying spree

SOME of the big institutional investors may still be forced sellers of shares, but others see the dip in the equity markets as a buying opportunity. Prince Al-Walid, Saudi Arabia's answer to the legendary Warren Buffett, has seen a buying opportunity and put another $500m (£323m) into the world's biggest financial firm, Citigroup, owner of Citibank, Travellers and Schroder Salomon Smith Barney. This brings his holding up to $10bn (£6.5bn).

On a different scale, directors have also been weighing into the market. Sixty-five directors of UK quoted companies bought this week, against just eight who sold.

All of this is reminiscent of when financier JP Morgan sought to demonstrate Wall Street's confidence in capitalism just before the 1929 Crash. We must pray that is where the parallel ends.